For months now, most of the focus about Bitcoin, a new digital currency, has been on the possibility of it could become an alternative currency (a replacement for the dollar, even). However, whether Bitcoin succeeds or fails as a unit of exchange, the innovative technology that it created — a decentralized payment without the need for a middleman — is here to stay. I made that case today in the Washington Examiner:
Most of the recent doomsaying concerns Bitcoin’s use as a traditional currency and is missing the best part of this new tool: Bitcoin as a technology. In fact, Brito, Castillo and Dourado have repeatedly pointed this out in their work.
I’ll leave the complex technical details to them, but the general idea is not so hard to explain. The best way to understand why Bitcoin is such a technological advancement is to compare it to the existing payment system. Let’s say you want to purchase an item online. Normally, the transaction would go through a third-party processor, like Mastercard or Paypal, to verify the exchange and send the money to the seller. These companies earn profits by charging fees and maintaining a current ledger of all transactions to prevent fraud and overspending.
Now comes Bitcoin, and with it, the ability to exchange directly without the need for a middleman. It replaces these third parties with its own programming by applying cryptography to verify and maintain its ledger of transactions.
Bitcoin is not controlled by any one government or company or person: It is maintained by thousands of individuals who choose to run the Bitcoin program on their computers. This program harnesses the computer’s processing power to verify and maintain the ledger of transactions. Every so often, some computers are rewarded with new bitcoins. This is how the supply of bitcoins increases; hence, these computers are commonly called “miners.” Altogether, Bitcoin as a technology allows individuals to transfer payments directly, quickly and cheaply.
While dramatic currency fluctuations capture the popular imagination, Bitcoin’s service as a decentralized payment system is what is truly exciting about it. For instance, small businesses that cannot afford credit card fees view Bitcoin as an affordable payment alternative that they can offer their customers. The potential applications for Bitcoin are almost endless.